In the context of consecutive strong rallies and valuations at historically elevated levels, a minor discrepancy in expectations has ignited market concerns over an "overheated AI bubble." This led to a significant weekly decline of 5.54% for South Korea's stock market, which had previously been a global leader.

KOSPI 200 index futures plummeted by 5% during trading, prompting the exchange to urgently trigger the "Sidecar" circuit breaker mechanism, suspending program trading for five minutes.

Shares of the semiconductor giants were severely impacted. SK Hynix Inc. plunged 9.92% for the day, while Samsung Electronics Co., Ltd. fell sharply by 6.4%. Just this past Wednesday, Goldman Sachs had raised its 12-month target price for the Korea Composite Stock Price Index (KOSPI) to 12,000 points, implying over 35% upside potential at the time. The firm stated that earnings per share for Asia-Pacific stocks are projected to grow 60% by 2026, with the technology sector remaining the strongest theme. As of June 5th, the KOSPI had surged approximately 93.65% year-to-date, briefly surpassing 8,900 points this week.

Softening at the Edge of the AI Narrative

On June 4th (U.S. Eastern Time), global AI chip giant Broadcom Inc. reported robust growth in its latest quarterly earnings. However, its sales guidance for AI chips in the third fiscal quarter ($16 billion) fell slightly short of the market's extremely aggressive and extreme expectations ($17.2 billion). Against the backdrop of continuous strong gains and high valuations, this minor expectation gap ignited fears of an overheated AI bubble. Broadcom's stock price plunged 12.59% that day, dragging the Philadelphia Semiconductor Index down 2.1%. Although individual giants like NVIDIA Corporation managed to close higher, the surge in profit-taking at elevated levels sent shockwaves through global tech stocks.

On June 5th, during the Asian trading session, Japan's Tokyo Electron Ltd. and SoftBank Group Corp. tumbled due to excessive AI exposure. The South Korean stock market, which had accumulated massive retail leverage in the preceding period, became the most severe outlet for this storm's release.

A 30-Year Historical Mirror: Leverage Then and Now

The scale of leverage is creating a historical mirror spanning nearly 30 years, from the "national bankruptcy" of 1997 to the "national euphoria" of 2026. On the eve of the 1997 Asian Financial Crisis, South Korea was immersed in the illusory prosperity of joining the "club of rich nations." The core of leverage at that time lay with corporations and banks, with chaebol debt ratios exceeding 400% and banks borrowing heavily in foreign currency. When the storm hit, the Korean won plunged over 50%, the KOSPI index collapsed 60%, and countless retail investors were left as casualties of the era in a passive chain of "corporate bankruptcies and credit contraction," watching their savings evaporate overnight.

In contrast, by 2026, driven by the AI computing power explosion and soaring demand for HBM chips, profits for Samsung and SK Hynix surged, propelling the KOSPI to a spectacular rally within the year, once breaching 8,900 points. However, the protagonists of leverage this time are proactive young retail investors. As of mid-May 2026, data from the Korea Financial Investment Association shows that the outstanding balance of margin loans used for stock purchases has ballooned to a record high of 36.47 trillion won, approximately double the figure from the same period in 2025. The proportion of margin trading has doubled from 18% a year ago to 35%. South Korea's Finance Minister expressed concern over the increase in leveraged stock investments, stating actions would be taken to address "herd behavior" in financial markets.

Forgotten Details from 1997

Research indicates the risks in the 1997 Korean stock market were: an imbalanced foreign debt structure, coupled with a collapsed fixed exchange rate regime, with the Thai baht devaluation acting as the external trigger. The transmission path was "exchange rate → foreign debt → banks → stock market." The potential risk transmission chain now could be: peaking semiconductor cycle risk + concentrated foreign ownership (U.S. capital accounts for 40% of foreign investment), with a transmission path of "stock market → leveraged position liquidations → consumption → real economy."

In 1997, when the Thai baht crisis spread to South Korea, foreign institutions detected anomalies and began a concentrated withdrawal. Within months, the won plunged from around 880:1 against the dollar to a low of about 1,962:1, depreciating over 55%. The KOSPI index fell from around 700 points at the start of 1997 to about 280 points. At the market's most frenzied moment, single-day declines of around 20% occurred. In 1998, South Korea's GDP contracted by approximately -5.5%, 1.5 million people lost their jobs, and the unemployment rate soared from about 2% to nearly 9%.

The Rhyme of 2026

Since the start of 2026, most Asia-Pacific currencies have trended weaker against the U.S. dollar. Disruptions to shipping in the Strait of Hormuz pushed Brent crude oil above $110 per barrel, directly impacting oil-import-dependent Asian economies like India (importing 88% of its crude), Indonesia, and the Philippines. During periods of rising geopolitical risk, global capital flows into U.S. dollar safe-haven assets, causing periodic strength in the dollar index, which pressures all non-U.S. currencies. Institutions like Goldman Sachs point out that the U.S. dollar is on the "positive terms of trade" side during energy price shocks, while most Asian economies are on the "negative" side.

The Korean won has shown a sustained weakening trend this year. As of June 5th, using January 2nd as a baseline, the won has depreciated over 6% against the dollar; using the closing price at the end of 2025 as a baseline, the depreciation exceeds 7%. The Bank of Japan's policy rate is only 0.75%, while the Federal Reserve's rate is maintained at 3.5%-3.75%. This nearly 300 basis point interest rate differential drives global capital to continuously short the yen for carry trades. Yen depreciation, in turn, drags down the Korean won and Southeast Asian currencies through contagion effects.

For the Korean stock market, a new risk in 2026 is the recent launch on May 27th of a single-stock double-leverage ETF, which attracted nearly $2 billion in two days of listing. Regulators warned its "maximum daily volatility could reach 60%." This is a new type of risk amplifier not present in 1997.

The similarities with history are alarming, but they do not guarantee the same outcome. The KOSPI's near-20% plunge during the U.S.-Iran conflict in February 2026, which forced massive retail liquidations, was already a "stress test rehearsal." South Korea's Finance Minister stated that foreign investors adjusting their portfolios is one factor causing volatility in the Korean stock market.

Practical Implications

This "epic bull market" has been almost entirely driven non-linearly by the "twin giants" SK Hynix and Samsung Electronics, which account for nearly 50% of the index's weighting. Gains among the other two thousand-plus listed companies vary significantly. With severe deterioration in index breadth, traditional index funds face extremely high concentration risk. The core question facing professional investors is: If you remove these two "ace cards," what remains of the Korean stock market?

The answer lies in the following five "foundational cards":

Foundational Card One: Hyundai Motor Group – transitioning from "car seller" to "physical AI," with its valuation logic shifting from traditional auto towards tech stocks (price-to-earnings ratio breaking upward from 8.3x).

Foundational Card Two: The Three Major Shipbuilders – benefiting from an LNG ship boom cycle, having secured orders for 32 LNG vessels in the first five months of 2026, almost matching the total for all of 2025.

Foundational Card Three: Defense & Military Industry – fully capitalizing on global geopolitical dividends, becoming a preferred supplier globally (Europe, Middle East, Southeast Asia) due to advantages in "high cost-performance and fast delivery."

Foundational Card Four: Financial Sector – benefiting from corporate governance reforms. The "Korea discount" has narrowed from 18% to 7%, with shareholder returns for KB Financial Group Inc. and Shinhan Financial Group Co., Ltd. continuously improving.

Foundational Card Five: Biopharmaceuticals – the next wave of Korean cultural influence (K-wave) supported by policy. The Korean government has designated "semiconductors, defense, and biotech" as three national strategic industries, enjoying long-term policy dividends.

In short, the true foundation of the Korean stock market, excluding the semiconductor twins, is: Hyundai making robots, supertankers filled with gas, missiles sold to Europe, bank stocks undergoing valuation repair, and biopharmaceuticals entering global markets. The question is, if Samsung and SK Hynix were to truly falter, could these five foundational cards independently support the KOSPI's high valuation above 8,000 points?

History Does Not Simply Repeat

A South Korean civil servant anonymously posted a screenshot of his brokerage account on the workplace community Blind: 2.3 billion won (approximately $1.7 million) fully invested in SK Hynix, of which 1.7 billion won was a margin loan from the broker. He wrote in the post: "I believe the semiconductor market will continue its uptrend until 2028, but I am taking a more aggressive approach to accelerate asset growth." His logic is not without reason: SK Hynix's HBM chips virtually monopolize the high-end supply chain for NVIDIA, the explosion in AI computing demand is real, and Goldman's target price is also real.

Having experienced SK Hynix's 9.92% plunge on June 5th, he has likely gained a profound understanding of how those equally confident Koreans before the 1997 crisis spent the year 1998. The capital markets' decisive sell-off following Broadcom's guidance miss serves as a wake-up call for all investors with singular faith in AI. History does not simply repeat, but it often rhymes.

Under that civil servant's post, one reply received the most likes: "I hope you remembered to set a stop-loss." The 12,000-point target may be the distant horizon in Goldman's eyes, but for professional investors, every doubling of the market is the ultimate stress test for their tools and understanding.